An Introduction to Working Capital and Cash Flow



Are you starting your first business? Do you currently run a business, but feel the company isn’t living up to its potential? Then working capital and cash flow are two important concepts for you to understand. There’s more to both of these ideas than crunching a few numbers and calling it a day, so here is some information to help you tell the two apart and understand why it’s important to keep records of both.

Working capital represents the operating liquidity of your business. You can compute this value by totaling your current assets and subtracting your current liabilities. You’ll be looking at your business’s inventory, accounts receivable and accounts payable. Within this computation you should also look for patterns and identify any cycles within your capital, which is the time it takes for particular assets and liabilities to convert to cash.

It’s important to note that working capital is different from growth capital. While the first can sometimes inform the second, they are not the same thing. You can think of the working side of capital as the money your business needs to operate and maintain certain functions. This is an immediate kind of capital, where growth capital is more concerned with long-term goals and growth. Growth capital is important to purchasing new equipment or moving to a larger location.

While working capital is concerned with the overall state of assets and liabilities, cash flow looks at the rate you are using and gaining money. For example, your total cost of operations is on the working side of things, but cash flow tracks your specific monthly payments for expenses like utilities and rent. A cash flow analysis looks at how much cash has changed hands in a specific time frame, such as a week, month, quarter or year.

Keeping track of your cash flow is important to making projections and understanding cash deficits. Simply checking your cash flow from time to time doesn’t tell you much, but with records you can try to find patterns to explain increases and decreases in your cash flow. Once these patterns are recognized, you can make adjustments to your business model to accommodate seasonal and other changes.

Start today on planning how you want to track your business’s working capital and cash flow. Keeping track of these two important values can help stabilize and grow your business. When you keep track of your assets, liabilities and how money flows into and out from your business, you’re better able to plan for the future.